tv Options Action CNBC February 26, 2012 6:00am-6:30am EST
this is "options action." tonight, black gold. how would you like to buy exxonmobil for just under a dollar? it ain't crude talk. it's options trade on the giant. we'll show you how you can make money too. plus call it a cool cat. we've got an options trade on caterpillar that can quadruple your money in months. it's an industrial strength trade you don't want to miss. and talk about an oscar worthy trade. >> you like me. >> last week khouw and carter got price line right. the action begins right now. live from the nasdaq market site, i'm melissa lee. these are the traders here in times square and in beautiful los angeles.
highest close for the s&p 500 since june of 2008. crossing 13,000. the nasdaq nearing 3,000. certainly a lot of nice round numbers. "options action" is sounding the alarm because of one number. and that is 109. that's where oil closed today. can stocks and crude coexist? let's get in the money now and find out. the move in crude spooked investors today. it was a growing concern in the market for awhile. >> growing quietly. equity indexes this week, the s&p closed up 25 bips. the vix was down about 3%. but crude was up 5.5%. gold was up 3%. there's things going on here as far as equities are concerned it's complacent. but in the other respects when you look at the risk assets you see people flock to when worried about things, they're going up. >> we've seen the vix also stay very low. >> yeah. i mean, it ended the day above 16.
same thing happened earlier in this month. you know what, this makes sense. oil is high. not outrageously high. but that's the only reason to be worried now. earnings are pretty good. some names doing well. there's not a lot of volatility in the market. the oil has an opportunity to take a ton out of the economy. just right off at the knees. that is obviously the big problem. >> mike khouw, at what point do you get concerned about where crude oil is and gasoline? a year ago in march we saw crude oil around where we're seeing it now. in that period, stocks and crude did move higher for about a month afterwards. >> yeah, well, you know it's interesting. there have been times in the past when rising crude oil prices will be expected to coincide with a rise in equity prices. that was basically when we saw a lot of concern about risk assets generally. that isn't what troubles me here though. i think the implications of higher crude prices on consumers
can depress the economy slightly. really we're seeing higher crude prices because of political risk. and that can create a downside shock. the fact that gold prices are higher could be a potential implication of the commodity markets there's increased relation risk. all things can spell disaster. >> mike makes a good point. historically the relationship has been crude moves higher because of a stronger economy and the stock market moves higher. this time it may be different because the highs are made on lower volumes, declining highs in the s&p 500 as we move higher and higher. >> no doubt about it. the chart they threw up there is an interesting one. when you look through august and october between the lows there, that's the vix. that's the s&p and crude. they're all kind of jumbled up together. then you see them go in separate directions. and the vix melts into nothing here. that relationship can exist for a bit longer.
but at some point something's going to give. then you'll see that stuff come back together. that's the worry for volatility. >> i think the lower volume is a good thing. it means there's not a lot of interest going on. it's generally fairly healthy, the growth that we're seeing. i think that actually this is one of those situations low volume's a good thing. >> well, i think twice i'm going to disagree with scott a bit. i would like to see higher volume here. what bid are you going to hit when things get pear shaped? that's the first level of concern i have about low volumes at this point. and the other thing is take a look at the stocks that performed exceptionally well. we're looking at the industrial names. these tend to be cyclical and driven for quite some time now for the biggest industrial revolution since our own in the united states. and of course these things are cyclical when that starts to unwind you can watch out there. >> i'm glad you mentioned industrials. caterpillar is one name dan is watching.
2012 has been a good year for cat. >> stock's up 29%. here's a company that has been a huge beneficiary of every global trade. they get 2/3 of the revenues from outside the u.s. they're big in china and south america. this is one where investors felt like the risk on trade -- they flock to it. 12 times earnings. growing at 28% this year with revenues growing about 18%. stocks trading 12 times, it seems cheap. it's inching up, it's making new 52 week highs every day here. on declining volume, we have a chart here. it's traded in lock step with crude oil. a couple instances where it's bifurcated. one of them was last summer when you saw breaking away. and you saw a steep decline. when you look at it there, it's doing the same thing here. i wanted to look out a couple months and put on what i think is a high probability, high
payout bet that the thing comes in here just a bit. >> dan is bearish. we certainly used the strategy before. it's always good to review it. crack open the playbook. this is a bear structure where you buy one put and sell a lower strike put of the same expiration to reduce your costs. it may sound complicated. you want that stock to go to the short put strike. dan, walk us through the trade. >> i want to isolate an area that's a 10% pullback. so i think that's a good level of support. going to look out to april and buy the april 110, 105 put spread. when the stock as 116.5, i paid a buck for it. i bought one of the april 110 puts for $2.45. i sold at 85 cents against it. so it cost me about $1. i'm sorry i have the wrong prices there. it cost me a $1. that's my max risk. so between 110 and 109, i can lose up to $1.
between 109 and 105, i make up to four. then below i make the full four. i like the risk there. >> mike khouw, i'm guessing you would agree with dan in betting bearishly on caterpillar. do you like the structure of this trade? >> i like it. he's getting long premium to make a bearish bet. they are reporting all-time highs and earnings. if you look over the course of the last ten years, this is company that has -- it's been cyclical. at the money options are cheap in cat but there's a lot of skew. what do i mean by that? the out on the money puts tend to be more expensive because of the risk. i like the direction of the trade. i like the direction he's betting in. >> all-time high earnings and fresh 52 week high. >> that's absolutely right. >> i don't like doing a put spread on cat. if the only thing you do is get bearish on stocks that have done
well, you get a portfolio that looks like something from the island of misfit toys. what i would say about cat is don't hate me because i'm beautiful. i don't want to pick tops and get bearish on names just because they've done well. if you're long the stock, this makes sense. because you can sleep at night. i wouldn't just get bearish. >> you know, i love scott because he's beautiful. but the flipside is -- you know, we have a market here that's getting a bit extended. i think this is a great, kind of high probability bet that you get a pullback. so i do want to pick some tops here. but i think the timing is not bad right here. how's that? >> portfolio of misfit toys. let's hit the stocks versus options button here. want sho short caterpillar, stocks can go up forever. and as a pop star prince once said, forever is a mighty long time. dan's put spread offers a four to one payout and only risks a hundred dollars. interesting risk award and obscure reference to prince. let's move on here. it is one of the most common
questions investors ask when they see triple digit oil. what is the best way to play it? according to our next guest, it could be as simple as the largest dow component. time to call to the charts with the always slick but never crude carter braxtonworth. of oppenheimer. >> it's not exciting. which is to say the market is stretching. this is a defensive asset. in terms of the structure and the chart, a lot of tension. it was here in february a year ago. nothing has happened in principle. this is the kind of debate to get resolved up. a breakout buy if you will. another way to draw it, it's the same chart. same time frame. is this way. which is to say you can call this something of a head and shoulders bottom. the presumption is exxon that has rested for two months is going to come to life. big name, as you say, we think
it's going immediately higher. >> carter's bullish. mike, what do you say? >> it's interesting when you look at names like exxon, it still looks cheap compared to the rest of the market. trading about 10.5 times earnings. the enterprise value is six times. it is not the all-time zenith. which gives you sense of the potential there. and of course it does track both its returns and of course how much money it's actually making. what is going on in the crude market very closely. we're seeing crude essentially going parabolic here. >> what do you say to do, mike? >> i think the easiest thing to do because this is a low volatility simply to go out and have the trade of buying a call. i'm looking at the april 90s. these were only trading about 80 cents when i was looking at them. that's less than 1% of the stock price. a quick caveat to that is the stock would normally pay a 53 cent dividend between now and
this next trade. if you own these call options, you won't get that. but still this is an exceptional bullish bet here. >> it's inexpensive but maybe for a reason. that is, volatilities are low on stocks because they don't move around a lot. dan, do you like this sort of trade? >> i do. up here i think it's the sort of thing where you're considering stock replacement in these fears out there and you think we're complacent, if you're long and enjoyed gains to pay 1% of the stock price that this continues to break out and goes the way carter suggests it will, i think that's a good way to do it. >> and oil is up here which is the reason you want to express your point of view in oil by buying option spreads. i think mike is right here for all of the right reasons. makes sense you're not spending much money and getting long options. >> there's one final point i'd like to make. sometimes there can be a win/win between the guys making markets and people who are making directional bets like we're trying to make one here. essentially the stock hasn't
moved around all that much, but it does trend. a week ago the stock was trading a couple dollars lower which demonstrates when you buy these cheap options, you have an opportunity to profit. the reason the traders are keeping the prices low is the way it makes those moves tends to be without a lot of big swings. >> let's hit the stocks versus options button once more. 100 shares of exxon, pony up about nine grand. up side leverage and only costs $80 which is how much it could cost to fill up an escalade at this price. meantime, got a question? send us an e-mail. "options action" at cnbc. we'll answer it in our one-on-one web extra after the show. you'll also find a lot of educational material there as well. check it out. here's what's coming up next. looks like they're flying high. last week they made a bullish bet on priceline.
the stock has soared. with money still on the line, what will these jet setters do? find out when "options action" returns. time for pump up the volume. the names that were heating up index sizzles this week. this business is in the business of curing what ails you. its stock price has almost doubled on news a new obesity drug could be soon for sale. who is it? the answer when "options action" returns.
where were investors pumping up the volume this week? vivus. call volume was ten times average daily volume. welcome back to "options action." time for the upside call where we take a look back on our winning trades. last week khouw and carter made a call on priceline. the stock has only moved a little, but they've made a lot. and here's how. on "options action," we only have one policy when it comes to price. risk less, you can make more. that's exactly what khouw and carter did on their bullish bet on priceline. carter thought shares were ready
to take a trip higher. >> great equilibrium. gives way to disequilibrium. >> wow, mike thought. not just that, but this equilibrium too. >> better get in on this priceline business. but there was a problem. 100 shares of priceline cost nearly $57,000. so to spend less, mike instead bought the april 620 strike call for a total of $20.50. now to make money, mike needs priceline stock to rise above that price by more than the cost of the trade or above $640.50 by april expiration. but 20 bucks? yo, bill, you're no longer with priceline, but you do make a good point. mike, show us how to do this for less. >> i'm going to sell the march 620 calls. >> well done. so to spend less, mike then sold the march 620 strike call for $13.80 and created his call calendar.
but he also made making money easier and here's how. between the $20.50 he spent buying one and the $13.80 he got selling the other, he cut his cost. to $6.70. now instead of needing it to rise over 20 bucks to raise money, if it trades above the $626.70 by april expiration. but it gets even better. that's because the value of the nearer dated call he sold will decrease faster than the longer dated call he bought allowing him to pocket the difference and do something even this guy can't do. turning time into money. of course there's a tradeoff spot. and in order to make the most money, mike needs priceline's stock to stay below the shorter dated call he sold by the first expiration. or in this case below 620.
but above the strike of the call he bought. or above 626.70 by april expiration. since the time of the trade, priceline shares rallied making khouw and carter winners. now they must make a choice. take profits ahead of earnings or hold out for more gains. "options action" fans only have one question. what will these two do now? >> before we get the answer, let's see how much money was made. had you simply bought priceline stock, you would have spent $57,000 and made 3%. mike's can be sold for $850 today. that's a return of 25%. price line reports after monday, does move a lot of earnings. if you have a trade on this should you stay long? let's go back to the charts and carter worth. >> in many ways the same trade as exxon. >> you have well defined tops. priceline just breaking out. and the presumption is once breakouts happen, typically they
continue to happen. this is very little movement as we just saw just 3%. we would think there's plenty more to the upside. >> what do you do? we've seen big moves in priceline so far this week. >> priceline does have an ability to move around. it can can move around sharply. it has had good moves to the upside actually. this is one of the instances showing on friday is a good thing. that means nobody can do anything with this trade for now and you shouldn't. you want to be short the month options through the catalyst. that's when you're really going to get the effect of that accelerated decay. that's what i expect to see next week. so i like the trade structure still and like the stock. >> scott, you're noting during the break we've already seen huge moves in priceline. >> yeah. we've seen huge moves. i think one thing mike points out that's interesting. i love calendars. we love these on the show. both of the expirations have to catch the same catalyst or the trade doesn't work out nearly as well. >> what do you say, dan? >> i also like the structure. i would be wary if you're making
a bet the stock's on a runaway here. at some point a lot of the good news has to be on the stock at least in the normal market. it doesn't seem we're in that normal market. >> when you say that and we've seen a lot of stocks make what seem to be runaway breakouts. >> apple is obviously the biggest example. >> but even take an ibm which hit a new 52 week high this week. >> that was purely technical. i'd love to hear what carter says about it. it was sitting at 193 and then all of a sudden 197. it broke out to all-time highs. we're seeing goofy stuff. >> a bunch of these momentum names do well. even netflix which many thought was dead has actually turned around. >> not all of those names are created equal. and the green mountain coffees and netflixs of the world are not my favorite stocks. ibm taking a lift off what was going on at hewlett though i don't make much sense of that. some of the stocks that are lag ards may present opportunities.
i might be looking to reverse out of some of these stocks that's been on a tear and look at ones getting to valuation levels you haven't seen in awhile. >> carter, what do you see on ibm chart? >> this is a case of quite steady, not extended. we would think higher here. >> all right. mike makes a good point. all stocks are not created equal. likely that ibm may be in your portfolio but not necessarily a netflix. >> ibm would not be in the island of misfit toys. >> right. our thanks to carter braxtonworth. if you want updates on our trades, follow us on twitter. handle@cnbc options. dan posts regular updates of his trades as well. at risk reversal. coming up next, the final call after this.
when i saw him, i thought that's a really good basketball player and i want to represent him. i can tell you as soon as i met him and had a chance to get a feel for him, i knew right away. i said this guy has got it. >> pretty lucky guy. he's roger montgomery, jeremy lin's agent. you can catch more of him in a special sports biz with darren ravel. that's tonight 7 p.m. eastern on the nbc sports network. now time for the final call. mike khouw kick us off. >> the april 90 calls are a way to make a move on exxon. >> i like that as well. mike is getting long volatility. >> dan nathan. >> cat i'm going to look out and make a short-term bearish bet. >> our time expired. i'm melissa lee. >> for more "options action" go to options action cnbc.com. see you next friday. meantime, "money in motion" is up after this break.